When a Public-Private Project Goes Awry: QuickTake Q&A

Recently built brick walls stand on a property in Chinchero, Peru, on Thursday, July 30, 2015.

Dado Galdieri/Bloomberg

An airport project in Peru offers a cautionary tale about public-private partnerships, a method used around the world to finance large public-works projects. Disagreements about financing and corruption allegations have stalled the project, causing headaches for President Pedro Pablo Kuczynski. His transportation minister resigned and now the scandal has ensnared the finance minister. At issue is a contract to build and operate the Chinchero airport, near the Machu Picchu ruins that draw tourists from around the globe.

1. Who has the contract?

Kuntur Wasi, a joint venture of Latin American airport operator Corporacion America and Lima-based Andino Investment Holding SAA, won a 40-year contract in 2014 to build and operate Chinchero with an investment of about $530 million. The two firms jointly operate five airports in the south of the country. They won Chinchero by offering to build the airport using less public money than the other two other bidders: Vinci SA and Grana y Montero SAA, and Grupo Odinsa SA and Mota Engil Peru SA. Upon completion of the airport, Kuntur Wasi was to be paid $265 million.

2. What delayed the start of construction?

After taking office in July 2016, Kuczynski insisted on changes to the contract. His chief issue was its stipulation that the government foot the bill for interest on the private financing Kuntur Wasi would obtain. The contract didn’t cap how much interest the government was prepared to pay; Kuczynski’s administration estimated it would total $590 million, exceeding the cost of the airport itself.

3. How was that resolved?

Under a contract addendum approved by Kuczynski’s administration, the government was to make payments to the company as construction progressed, avoiding the need for private financing. The government said construction could start as soon as Peru’s comptroller’s office conducted an audit of the addendum.

4. Did that solve the problem?

Hardly. Contract addendums have come under extra scrutiny in Peru since the eruption of the sweeping bribery scandal involving Brazil’s Odebrecht SA, Latin America’s biggest construction company. (The investigation has shown that Odebrecht and other Latin American companies won contracts with low bids, then systematically increased costs through addendums.) Lawmakers in Peru’s opposition-controlled congress spoke out against the airport addendum, saying it shifted too much financial risk onto the government -- exactly what the public-private partnership model is supposed to avoid. In addition to calling on the government to terminate the contract with Kuntur Wasi, lawmakers began asking tough questions of Kuczynski and his administration. Meanwhile anti-corruption prosecutors at the attorney general’s office opened an investigation into the 2014 contract.

5. What are the allegations?

Some lawmakers suggested Kuczynski may have tried to salvage the contract because of ties between the company and members of his administration; the sister of cabinet chief Fernando Zavala was head of communications at Andino, a post she’s since resigned. Transportation Minister Martin Vizcarra, who was repeatedly summoned to Congress to explain the addendum, resigned on the eve of the publication of the comptroller’s report on the addendum on May 21. He cited a lack of political support for the contract.

6. What did the comptroller’s report find?

It said a contract addendum wasn’t warranted given that Kuntur Wasi’s financing proposal had already been rejected by the Transportation Ministry. It recommended criminal charges against 10 officials. Ministers said the report had serious flaws; lawmakers from the ruling party said the findings were politically motivated.

7. How did the government respond?

The new transportation minister, Bruno Giuffra, said on June 4 that the government had reached a deal with Kuntur Wasi to terminate the contract by mutual agreement, avoiding a potential arbitration suit. Earth-moving works were to begin while the government weighed other options for the construction and operation of the airport. But then Panamericana Television aired a recording of a meeting in mid-May between Finance Minister Alfredo Thorne and the comptroller general, Edgar Alarcon, in which they discuss the ongoing Chinchero audit as well as the comptroller’s request for a budget increase. Opposition lawmakers have accused Thorne of using the budget to sway the comptroller over Chinchero.

8. Will the airport ever get built?

Despite several false starts over the last four decades, it seems like this time it will be. The government plans to start site preparation as soon as possible and then in the next 18 to 24 months either put a new PPP contract out to tender or build the airport as a public facility. Kuczynski laid a symbolic first stone at the site in February, before the deal unraveled. He’s dismissed concerns that the altitude of Chinchero, about 12,300 feet above sea level, and the geology of the area make it unsuitable for an airport.

9. Is Peru a big user of public-private partnerships?

It’s among the biggest in Latin America. Between 1993 and 2016, Peru awarded 103 infrastructure projects worth more than $30 billion under the scheme. Contract awards rose to a record in 2014 thanks to two mega projects: a natural gas pipeline and Lima’s first subway line, both of which are way behind schedule. Kuczynski overhauled the PPP process to improve the selection of projects, make it more nimble and less vulnerable to corruption. The government plans to award licenses for more than $14 billion of projects between 2017 and 2018.